Securing a child’s educational future requires sound financial planning, as education costs have risen quite a bit over the past few years. Individuals need to take proactive measures and build a solid savings fund and contingency plan to keep up with the rising tuition costs. Budgeting, setting aside money, and using financial tools can help here. Individuals can build a solid fund to secure their children’s education using certain tried-and-tested methods.
Open a 529 College Savings Plan
A 529 plan is a tax-advantaged account governed by Section 529 of the Internal Revenue Code made specifically to set aside money for college expenses. Once individuals open this account, the money within it grows tax-free. They do not have to pay taxes when they use it for higher educational expenses, such as books, tuition, and hostel rooms. Many states also offer tax breaks when individuals contribute to their state-sponsored 529 plans.
This plan offers several other tax breaks besides the tax benefits mentioned above. For instance, individuals get tax-free growth on qualified withdrawals and potential state tax reductions.
Open a Coverdell Education Savings Account
Another top tax-free alternative for saving for a child’s education is investing money in Coverdell Education Savings Accounts, or Coverdell ESAs. The savings account offers a tax-advantaged option for college savings. This fund has a lower annual contribution limit than the 529 college savings plan, and each beneficiary must pay $2,000 annually. Its lower annual payment amount makes it more accessible and financially attractive to those with multiple young children.
The main benefits of Coverdell ESA include tax-free growth and withdrawals when the money is used for educational expenses. Unlike the 529 college savings plan, the Coverdell funds can be used for qualified school costs from elementary school to college. Individuals do not need to choose between a 529 college savings plan and a Coverdell ESA to save for their children’s education. The latter works well alongside 529 plans, especially for those planning to save money for college and K-12 private school. However, it is important to note that there are income limits that affect who can contribute to a Coverdell ESA, and contributions must cease once the child turns 18.
Consult a College Advisor
Before building a fund and seeking saving tips for tuition, individuals need to know what financial options they have to monetarily secure their children’s careers and overall future. It is crucial to understand which types of financial aid require repayment and which do not. Grants, scholarships, and awards are free funds to help children with their education. A professional college advisor helps individuals navigate such options and understand all the financial alternatives available to them. Certified professionals charge for their help researching colleges, filling out admission forms for financial aid, and interpreting the monetary aspects of award letters and acceptance. In most cases, their guidance is valuable.
Various institutions have school-specific admissions forms to receive financial aid. College advisors can help individuals populate their College Scholarship Service Profile (CSS) for non-federal financial aid and Free Application for Federal Student Aid (FAFSA).
Look Up Custodial Accounts
Known formally as UTMA (Uniform Transfers to Minors Act) or UGMA (Uniform Gifts to Minors Act), this plan lets parents irrevocably give assets to minors, but an adult custodian retains control of the assets until the minor reaches age 18 or 21 (or, in certain states or certain special circumstances, 25). The minor takes control of the account when they grow old enough. The account content and whatever is in it belongs to this new account holder as soon as he or she reaches the age of majority. There can be legal regulations and restrictions on investments within these accounts.
Opt for a Traditional Brokerage Account
Custodial accounts may not offer individuals absolute control of their savings. Individuals seeking alternatives that allow more control can open a traditional brokerage account while their child is still a minor. They can retain control of the account even after the child reaches adulthood. When individuals feel their child is ready to inherit the money, they can transfer the account to their name.
A traditional brokerage account also allows children to become beneficiaries of the accrued money if their parents pass away or become incapacitated in the interim. Parents should be aware of gift tax laws when giving their kids money.
However, one potential downside of this account is that it may result in higher taxes. Parents are taxed on any earnings at their tax rate.
Invest in a Roth IRA for Children
This is a conventional retirement savings fund, but parents can use a variation of this scheme to save for their child’s education and future. Custodial individual retirement accounts (IRAs), particularly Roth ones, are powerful ways to secure a child’s future. Parents need to inform the fund authorities about the income they have earned in the year. The earned income does not need to be from a traditional job with a W-2; it can also be through gigs such as cutting grass and babysitting. A parent’s contributions to a Roth IRA option cannot exceed their earned income. The benefits of a Roth IRA extend beyond just a child’s educational management and also toward their retirement savings avenues.
In several families and cultures, supporting a child’s education exists within the collective. A child’s grandparents, aunts, uncles, and other family members are usually willing to help with school and college costs.
Several 529 plans also offer online gifting platforms where relatives can directly add money. Also, contributions made to government-backed funds for a child’s education offer several tax benefits to benefactors.